Beware the Financial Pitfalls of Shop-in-Shop Arrangements

March 3, 2016byJCK Magazine

The store-within-a-store model is nothing new; after all, department stores have had cosmetics counters for decades.

A more recent development is this business model’s growing movement into jewelry retailing, in which a brand partners with an independent retailer to create a shop-in-shop. This might sound like a way to build a new customer base attracted by the brand’s popularity—and it certainly can be—but many store owners don’t realize the often- considerable expenses.

Owners are required to cover the cost of buildout themselves, which can easily go into six figures. There is also the cost of the inventory: Watch and jewelry brands that practice shop-in-shop models generally require their independent retail partners to stock a large quantity of their current inventory. Industry experts say an initial outlay of a quarter-million dollars isn’t unheard of.

What’s more, this isn’t just a one-time investment. Depending on the terms of the deal, retailers likely will have to refresh the brand’s display area every few years and invest maybe twice a decade in a full overhaul of everything from showcases to lighting to flooring. Owners need to contemplate whether this is a commitment they are willing to undertake, and it’s not a decision that should be made lightly.

The shop-in-shop concept bears some similarities to the franchise model used by fast- food brands. Unlike traditional franchising, though, a jewelry store owner doesn’t have a protected-territories clause that would prevent a competitor down the road from setting up that same brand inside their store, too.

This kind of capital-intensive investment should give a retailer pause. If sales from the branded products don’t increase revenue significantly, the cost of hosting a brand—generally financed by debt—can threaten to undermine a store’s financial health. As with all transactions, but especially when considering a shop-in-shop agreement, caveat emptor.